Friday, May 18, 2018

Consumers have to do better, if GDP growth is to exceed 3 percent, as the
recent tax cut bill promised. Consumer spending was weak in the first quarter
and the first look at the second quarter is no better than moderate. Total
retail sales rose an as-expected 0.3 percent in April. That still means retail
sales are increasing almost 5 percent annually, but that can’t continue with
such small monthly increases.

Vehicle sales, despite a decline in previously reported unit sales, posted a
rise of 0.1 percent in the month which is very respectable given the oversized
comparison with March when sales jumped 2.1 percent. Gasoline sales rose 0.8
percent on higher prices in the month and when excluding both vehicles and gas,
retail sales matched the 0.3 percent showing at the headline level.

And manufacturing is picking up for the second straight month. Industrial
production rose 0.7 percent in April, the Federal
Reserve said Wednesday. Strength is the message from industrial production
which rose 0.7 percent in April on top of an upward revised 0.7 percent gain in
March, which should boost Q2 GDP growth above the 1.9 percent Q1 initial
estimate. But that won’t get us to 3 percent GDP growth, either. Manufacturing
production moved 0.5 percent higher. Mining once again leads the gains with a
1.1 percent surge in the month with utility output also positive at a 1.9
percent gain.

Details throughout the retail report were mixed: furniture, which offers a
reading on housing demand, extended recent strength with a 0.8 percent gain but
restaurants, and their indication on discretionary spending, fell 0.3 percent
but following a sharp gain in February, reports Econoday. Building materials
rose 0.4 percent in another positive sign for residential investment while
nonstore retailers, the report's strongest component, posted a solid 0.6 percent
gain.

Today’s new-home construction report was also positive, as housing demand
remains robust, but the jury is still out on whether the massive tax cuts will
boost consumer spending at all, and so economic growth past the 2 percent plus
annual rate that has prevailed since the end of the Great Recession.

Friday, May 11, 2018

The results are already in on the current administrations tax and economic
policies. They are carrying Ronald Reagan’s trickle-down economy to an even
lower level. Let’s call it the ‘Drip-Down Economy’, since none of the benefits
will reach the bottom wage-earners. In fact, they will lose money and benefits
with the latest economic policies enacted by the Trump administration and
Republican congress.

This is when corporate America is expected to post its
best quarter of profit growth in seven years, according to Marketwatch’s
Ryan Vlastelica. Through 2016 “For the poorest American families, in the lowest
fifth of wealth, their net worth shed 29 percent over that period (actually
2007-16). Drops of at least 20 percent were also seen in every income percentile
for those in the 80-89.9 percentile, where the decline was a more modest 5
percent. The wealthiest decile, however, saw a jump of 27 percent, as seen in
the above chart.”

Nobelist Paul Krugman has chimed in on the same growing inequality topic
several times, since the recently passed record tax cuts that finally gave
Republicans what they wanted—much lower corporate and small business tax
cuts (including real estate LLCs like Trump’s) will further increase the record
federal debt:

“Anything that increases the budget deficit should, other things being the
same,” says Krugman, “lead to higher overall spending and a short-run bump in
the economy (although there’s no indication of such a bump in the first-quarter
numbers, which were underwhelming).
But if you want to boost overall spending, you don’t have to give huge tax
breaks to corporations. You could do lots of other things instead — say, spend
money on fixing America’s crumbling infrastructure, an issue on which Trump
keeps promising a plan but never delivers.”

The main problem with the new tax bill is it allows an additional $1.5T added
to the deficit over ten years, while cutting Medicare and Medicaid spending by
almost as much. This is while most S&P 500 corporations have said it doesn’t
change their overall spending plans (except for a few token raises).

To rub even more salt into the wounds of working adults, their incomes still
aren’t rising above inflation, as has been mostly the case for the past 30
years.

“Average hourly earnings were expected to approach the 3 percent line two
years ago when the unemployment rate first started to move below 5 percent, let
alone the sub 4 percent rate where it is now,” says Econoday with the
accompanying graph.

The tight labor market is especially evident in what’s often called the
“real” unemployment rate. The so-called U6 rate includes people who can only
find part-time work, and those who’ve gotten so discouraged stopped looking in
the past 12 months. It fell to 7.8. percent in April to drop below 8 percent
for the first time since 2006. The labor market almost back to normal, in
other words, yet it hasn’t boosted the incomes of most working adults.

So why do we have even worse inequality today with nearly full employment, in
which economic benefits are being taken away from not just the lowest income
brackets with reduced health care and other benefits, but almost all of us?

All signs say we are nearing the end of the second-longest growth cycle since
the Clinton era’s 10-year 1991-2001 boom years, as I said last
week; and once again a huge amount of debt has accumulated that ultimately
has to be paid for.

These are the conditions that ultimately led to both the Great Depression and
Great Recession. Are we to have an even greater recession, or depression—God
forbid?

Not unless something is done in the next congress to restore those benefits
and rescind most of the tax cuts that are neither benefiting most of US, nor
improving the record budget deficit.

Thursday, May 10, 2018

Total nonfarm
payroll employment increased by 164,000 in April, and the unemployment rate
edged down to 3.9 percent, the U.S. Bureau of Labor Statistics reported today.
Job gains occurred in professional and business services, manufacturing, health
care, and mining, with manufacturing contributing an oversize 24,000 to
payrolls.

The unemployment rate slipped to 3.9 percent—a 17-year low—after holding at
4.1 percent, for six months in a row, said the BLS. The decline owed to a
shrinking labor force and fewer people saying they were unemployed instead of an
increase in how many people found work. The labor force actually shrank by
236,000, while the number of unemployed dropped by 236,000 in the Establishment
(payrolls) survey.

The tight labor market is especially evident in what’s often called the
“real” unemployment rate. The so-called U6 rate includes people who can only
find part-time work and those who’ve gotten so discouraged they recently stopped
looking. It fell to 7.8. percent in April to drop below 8 percent for the
first time since 2006. The labor market is almost back to normal, in other
words.

All signs say we are nearing the end of the second-longest growth cycle since
the Clinton era’s 10-year 1991-2001 boom years I said yesterday; and once again
a huge amount of debt has accumulated that ultimately has to be paid for.

Are we dangerously close to the end of this growth cycle, as the Fed tightens
credit after years of easy money and consumers then cut back on their spending
that powers some 70 percent of GDP growth?

The Fed passed on raising interest rates in this week’s FOMC meeting, mainly
because there were few signs of inflation, which was backed up by today’s
unemployment report. Hourly pay rose just 0.1 percent to $26.84. The 12-month
increase in pay was flat at 2.6 percent for the third month in a row. But prior
months were revised upward, at a net 30,000 gain in March and February. Payroll
growth includes a solid and slightly better-than-expected 24,000 gain in
manufacturing with construction up 17,000, mining up 8,000, and professional
business services up a sizable 54,000.

The good news there are still 5.0 million job seekers working part time that
want to work full time, and an additional 1.4 million that have looked for work
in the past 12 months, but not in the past 4 weeks. The private service-sector contributed the most jobs as usual—119,000, with
professional and business services up 54,000 jobs, and education and healthcare
contributing an additional 31,000 to the total.

Business investment and exports are rising, but should be rising faster with
the new tax bill, according to New York Times Paul Krugman:

“Anything that increases the budget deficit should, other things being the
same,” says Krugman, “lead to higher overall spending and a short-run bump in
the economy (although there’s no indication of such a bump in the first-quarter
numbers, which were underwhelming).
But if you want to boost overall spending, you don’t have to give huge tax
breaks to corporations. You could do lots of other things instead — say, spend
money on fixing America’s crumbling infrastructure, an issue on which Trump
keeps promising a plan but never delivers.”

So what is normal at this late stage of the business cycle? Wages aren’t yet
rising fast enough to warrant a more hawkish inflation watch by the Fed, but
they ultimately will as even fewer new workers are available, so that companies
have to pay more for skilled workers, as well as invest more in automation to
keep growing.

But we still have all that new public debt to worry about, so interest rates
will continue to rise to finance the additional debt, until it crimps further
business expansion; as always happens at this stage of a business cycle. So stay
tuned!

Wednesday, May 2, 2018

We are nearing the end of the second-longest growth cycle since the Clinton
era’s 10-year 1991-2001 boom years; because once again a huge amount of debt has
accumulated that ultimately has to be paid for. Are we dangerously close to the
end of this growth cycle, as the Fed tightens credit after years of easy money
and consumers then cut back on their spending that powers some 70 percent of GDP
growth?

The Clinton era ended with four years’ of budget surpluses, thanks to higher
taxes, and caps on government expenditures that included lower defense spending
as the USSR disintegrated and the Cold War wound down; a virtuous cycle that
paid down the public debt substantially for future generations.

Then GW Bush was elected and he immediately pushed through huge tax cuts,
while declaring war on Afghanistan and Iraq after 9/11. This meant massive
budget deficits as they hadn’t put aside any monies to pay for those tax cuts
and ongoing wars. To make a long story shorter, the massive borrowing that
resulted to finance that debt left us with the busted housing bubble and Great
Recession.

Which of these endings will we see with the current business cycle, the
second-longest since the Clinton era? How will this cycle end with the current
wild swings in stock and bond values? Does such uncertainty signal an oncoming
recession, as more investors lose faith in the financial markets?

A simplified description of business cycles is economies begin a new cycle
with big boosts in borrowing to stimulate additional demand with easier credit
after a prior downturn (e.g., 2001 dot-com recession), and end with too much
borrowed money in circulation that overextends business activity and ultimately
begins the next downturn in business activity (e.g., Great Recession).

And when the day of reckoning comes that requires some of the debt to be paid
down—it can be because foreigners flee our credit markets, or record credit
defaults as happened with the busted housing bubble—credit is tightened,
interest rates rise, and demand declines so that economic growth begins to
contract causing millions of job losses.

The US economy is again dangerously over indebted, so much so that Congress
cannot find the monies to fund some of the $2.2T in deferred infrastructure
maintenance and replacement that would boost growth and create more good jobs.
Republicans have instead focused on cutting back health care spending and taxes
of businesses that say they don’t plan to spend very much of the savings on
increased wages and future investments that would grow more jobs.

“In short,” says New York Times Nobel columnist
Paul Krugman, “the effects of the Trump tax cut are already looking like the
effects of the Brownback tax cut in Kansas, the Bush tax cut and every other
much-hyped tax cut of the past three decades: big talk, big promises, but no
results aside from a swollen budget deficit.”

So once again we are approaching that budget precipice of December 2007,
which was the beginning of the Great Recession—too much debt with no additional
tax revenues to pay for it. The Trump tax windfall has gone to those that invest
and spend the least—corporations, their CEOs, stockholders, Wall Street, as I’ve
said—while the Federal Reserve will continue to restrict credit to consumers by
raising short term borrowing rates.

When do we reach the end of this boom cycle and begin another recession? One
indicator is the narrowing difference between short and long term interest
rates—the so-called declining Treasury yield curve. Long term rates are still at
post-WWII lows, so the gap has narrowed, meaning commercial lenders cannot make
much of a profit on what they lend longer term, which also restricts available
credit.

Another sign is the very low personal savings rate of consumers today—some
3.4 percent of disposable income (because they must borrow to keep spending).
Fourth quarter GDP growth surged to 2.9 percent because consumers went on a
spending spree. But Q1 GDP’s advance estimate was lowered to a 2.3 percent
growth rate because consumers were tapped out. And most of the tax cuts benefit
just 10 percent of skilled professionals and stock holders, according to initial
estimates—so this won’t benefit most consumers.

That means government expenditures on public works and other forms of public
assistance that directly boost economic growth is needed to mitigate the effects
of the next recession, as it did during the Great Depression. The lesson, as
always, is our tax dollars should primarily be used for the public good, not to
increase the private wealth of wealthy donors and their special interests.

Monday, April 30, 2018

Real gross domestic product (GDP) increased at an annual rate of 2.3 percent
in the first quarter of 2018, according to the "advance" estimate released by
the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.9
percent.

It dropped from the Q4 2.9 percent growth rate because of a decline in
consumption. Consumers were probably tapped out from the holiday shopping
splurge, and consumer spending now makes up 70 percent of GDP activity.

“The increase in real GDP in the first quarter reflected positive
contributions from nonresidential fixed investment, personal consumption
expenditures (PCE), exports, private inventory investment, federal government
spending, and state and local government spending. Imports, which are a
subtraction in the calculation of GDP, increased,” said the
report.

Businesses picked up the slack, however, said commentators. Investment in
structures such as office buildings and drilling rigs doubled to 12.3 percent
while spending on equipment was up 6.1 percent. It looks like the biggest
corporate tax cuts in 30 years may have helped give a lift to investment in the
first quarter.

More drilling rigs won’t help our aging infrastructure, however, now some
$2.5T in arrears on the deferred maintenance and replacement of our roads,
bridges, electrical grid, water systems, and so forth. And the longer we wait to
repair and upgrade our infrastructure, the further we fall behind China and
other surging economies in growth.

Congress gave corporations the tax cuts, but that won’t help our productivity
or future growth if they don’t now begin to spend on the public works that keep
us competitive with the likes of China that is spending on everything including
developing alternative energies to wean them from the polluting fossil fuels
that the current US administration will not.

It is economic suicide, really, for Republicans to be cutting taxes to line
their supporters’ pockets (some $1.5T over 10 years) and cut spending on
Medicare and Medicaid to pay for it in the latest tax bill, when the $1.5T
should have been used to keep the US competitive with the rest of the world.

The value of inventories, which adds to GDP, also increased to $33.1 billion
from $15.6 billion. Investment in new housing was flat. In a surprise, the U.S.
trade picture brightened. That also contributed to the higher-than-expected GDP.
Exports rose 4.8 percent to outpace a 2.6 percent increase in imports.
Government spending was also a bit stronger than expected, up 1.2 percent, said
the BEA.

But hints of higher inflation in wages and salaries may cause the Fed to act
sooner in this week’s FOMC meeting, rather than in June. The government reported
the employment cost index rose 0.8 percent in Q1 which is the high end of
expectations. The year-on-year rate is up 1 tenth to 2.7 percent for the
highest reading of the last 10 years.

“And wages & salaries, not benefits, are the leading source of
pressure, up 0.9 percent in the quarter for an annual 2.7 percent increase. But
benefits are also up, climbing 0.7 percent for 2.6 percent year-on-year,”
reports Econoday.

I maintain the Fed should not be raising rates further, until employee
incomes have a sustained chance to break the inflation barrier of 2.5
percent—maybe for the rest of this year? The fact that it’s taken 10 years for
wages and salary rises to return to levels prior to the Great Recession (per
above graph) should tell us why it has taken us so long to recover. It’s the
workers who have suffered most from the Greatest Recession since the Great
Depression, not the banks and corporations.

Thursday, April 26, 2018

In spite of rising mortgage rates, new-home sales are booming and consumer
confidence is at multi-year highs. March new-home sales rose 4.0 percent
annualized to 694,000 and is just off the expansion high of 711,000 set in
November last year.

"Sales of new single-family houses in March 2018 were at a seasonally
adjusted annual rate of 694,000, according to estimates released jointly today
by the U.S. Census Bureau and the Department of Housing and Urban Development.
This is 4.0 percent above the revised February rate of 667,000 and is 8.8
percent above the March 2017 estimate of 638,000," said their
report.

Interest rates are rising, so what gives? Part of the answer is newly
married millennials (Gen Y’ers) are entering the housing market in greater
numbers, and personal incomes continue to rise faster than inflation. The share
of new, entry-level buyers for existing single family homes has risen back to 40
percent of sales, according to the NAR.

Interest rates haven’t risen that much, either, and it’s April when consumers
should be seeing larger tax refunds with the new tax bill. The 30-year
conforming fixed rate is still 4.125 percent in California for a 1 pt.
origination fee with the best lenders, for instance, which is up just 0.375
percent from last year’s low.

Graph: Econoday.com

The Conference Board’s Consumer Confidence Index is up 6 percent in one year,
and those surveyed said buying plans are special positives of the April report
including big gains for autos, where sales were already strong in March, and
also housing where this week's data are confirming strength. Inflation
expectations, however, remain unchanged at 4.7 percent which is low for this
reading.

“Consumer confidence increased moderately in April after a decline in March,”
said Lynn
Franco, Director of Economic Indicators at The Conference Board. “Consumers’
assessment of current conditions improved somewhat, with consumers rating both
business and labor market conditions quite favorably. Consumers’ short-term
expectations also improved, with the percent of consumers expecting their
incomes to decline over the coming months reaching its lowest level since
December 2000 (6.0 percent).”

Rising interest rates are affecting both stocks and bonds, with the
S&P having lost all its gains this month, and the 10-year bond yield
breaching 3 percent. Traders are spooked because they have been living off
fabulously cheap borrowed money to do their trading, the lowest rates over the
past 4 years equaling post-WWII lows, which may no longer be the case. The Fed
says so, at least, as they no longer want to buy some of those T Bonds to keep
long term rates this low.

But stay tuned, with the world order changing rapidly, and a President being
investigated for criminal activities. Bonds have been a notoriously popular safe
haven in times of panic, and we are seeing such signs on many fronts, which
could drive interest rates back down to historic lows, even with a booming
economy. Markets need supervision by capable adults, while budgets have to be
paid for, eventually.

Thursday, April 19, 2018

We know the results of trickle-down economic theory that says lower taxes and
government regulations are supposed to lift all boats, as epitomized in
Republicans’ latest tax bill. After the ninth year of this recovery, just 10
percent of American household benefited at all from subsequent economic growth.

In spite of the huge stock market recovery that has the S&P 500 index of
largest US corporations up more than 25 percent since 2009, only the top 10
percent of income earners increased their net worth.
The busted housing bubble was a culprit, but also labor practices that have
literally either outlawed collective bargaining for many workers, or enacted so
called right-to-work laws that enable union members not to pay dues, even if
they have benefited from union bargaining.

The result is that 25 percent of American workers earn less than
poverty-level wages of $24,000 for a family of four, and household incomes
haven’t risen faster than inflation since the 1980s. The national minimum wage
hasn’t risen above $7.25 per hour since 2009, either.

Princeton’s Nobel laureate Angus Deatonhas studied poverty and its
causes for most of his professional live.

He said in a recent Project
Syndicate article, a progressive journal: “Making matters worse”, he said,
“more than 20 percent of workers are now bound by non-compete clauses, which
reduce workers’ bargaining power—and thus their wages. Similarly, 28 US states
have now enacted “right-to-work” laws, which forbid collective-bargaining
arrangements that would require workers either to join unions or pay union dues.
As a result, disputes between businesses and consumers or workers are
increasingly settled out of court through arbitration—a process that is
overwhelmingly favorable to businesses.”

This is while corporate America is expected to post its
best quarter of profit growth in seven years, according to Marketwatch’s
Ryan Vlastelica. “For the poorest American families, in the lowest fifth of
wealth, their net worth shed 29 percent over that period. Drops of at least 20
percent were also seen in every income percentile except for those in the
80-89.9 percentile, where the decline was a more modest 5 percent. The
wealthiest decile, however, saw a jump of 27 percent, as seen in the above
chart.”

As I have covered in countless past columns, America actually ranks among the
worst countries when it comes to income inequality, based on its Gini
coefficient, a measure of the wealth distribution of a country’s residents. The
coefficient for the U.S. is slightly less than 0.40, which puts it roughly even
with Turkey and Botswana, and more unequal than nations as Israel, Greece,
Spain, and Germany. Iceland, the most equal society measured by Deutsche Bank,
has a coefficient below 0.25.

There are many remedies to this situation. One has but to look at past
history. Our fastest growth period was during the 1950s and 1960s, when the top
income-earners’ tax bracket was 92 percent, unions were strong, and corporate
CEOs earned 25 times what their employees earned. This built both the physical
and digital infrastructure that gave us the record prosperity of that era. We
also developed the Internet, and landed on the Moon.That tax structure was a way of redistributing income where it would do the
most public good.

Today, corporate CEOs in the largest corporations earn on
average 300 times what their employees earn. We enrich the already wealthy, in
other words, and neglect to plant the seed corn that would create future
prosperity.

Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.